Running a cannabis venture can be difficult and stressful. There are complicated regulations and compliance guidelines you must meet; lack of banking services; security to worry about; plus, vendor relationships and customer needs to service daily. One of the last things a cannabis business owner may be thinking about is their accounting system.
Come tax time, however, many business owners find themselves scrambling to sort through their expenses and track their relevant tax information. Even if you use an accountant to file your taxes, it can be tricky to know what to give your accounting firm to best take advantage of available tax deductions.
Follow these guidelines to create an organization system tracking your tax information, and take some of the stress out of running your cannabis business.
Tip 1: Know everything about COGS and 280E
280E is a federal regulation that impacts what a cannabis company can deduct on their taxes. To summarize, since cannabis is still considered a Schedule 1 substance at the Federal level, state licensed and legal cannabis businesses cannot claim normal business deductions like payroll, marketing expenses, or rent. Obviously, this is a big disadvantage for cannabis industry operators.
However, that’s not to say you can’t deduct anything from your business expenses. The “cost of goods sold” (COGS) are allowed as a deduction from gross revenue. This includes things like packaging, labeling, and other marketing costs related to the sale of cannabis. Explore more about what can be deducted under COGS in some of our previous posts:
- Marijuana Business Cost of Goods Sold (“COGS”) Overview
- Cost of Goods Sold Adjustments for Medical Marijuana Related Companies
Tip 2: Set up your accounting system.
At a basic level, your accounting system should include the following things.
- A chart of how your various accounts are set up
- A determination of shared expense allocations
- The process you and your employees will use for ongoing and timely accounting
- How accounting transactions relate to each other and how they should be recorded.
A sample chart of accounts is a listing of each account owned by your cannabis company. The chart includes the account type and balance, shown in the order in which each account appears on your cannabis business’ financial statements. Here’s what a basic chart of accounts might look like:
1000 – Cash
1500 – Inventory
2000 – Equipment
3000 – Equity
4000 – Sales
5000 – Cost of Goods Sold
6000 – Administrative Expenses
Of course, you might be a little creative in how you open your bank account; or, these accounts might be separate cash ledgers that help you keep your transactions differentiated.
Remember: cost of goods is first included in your cost of inventory. For example, if you buy fertilizer, that expense will be included in your inventory value until the plants are sold. So, what that means is that as costs accumulate from seed to sale, the value of your inventory also increases. These costs are not “written off” as expenses. Once the inventory is sold, it becomes the cost of goods sold. Therefore, your chart of accounts should include details for all costs as they move from intake to final sale.
Tip 3: Keep track of everything in an accounting system
Even if you can’t deduct everything from your taxes, you should still keep track of all your expenses. At tax time, an accountant or a little research can help you differentiate between COGS or “selling, general, and administrative (SG&A) expenses, which are those not deductible under the 280E.
Here’s where your bookkeeping becomes mission critical. Each cost needs to be detailed in your accounting system with the right tracking and allocation, as outlined above.
What’s a shared expense allocation? This is something like rent or lease interest, or electricity that may be allocated separately to COGS and SG&A expenses. This can get a little complicated, so it’s best to record each shared expense along the way (with documentation) and consult a CPA at tax time.
Tip 4: Create bookkeeping best practices
Once you have the processes in place, keeping track of your expenses becomes seamless. Make sure you have a system in place for recording transactions and reconciling cash, reviewing and maintaining lease schedules for equipment and other property, and keeping an audit trail with all documentation for purchases throughout the year. You should also be prepared to do a 280E compliance check at least once a quarter!
Tip 5: Practice strong inventory management outside Metrc
California requires businesses to track all cannabis and cannabis products from seed to sale in the Metrc system. However, as we’ve detailed before, strong inventory practices are mission critical to being compliant with all industry regulations. Inventory directly relates to sales and data, and many inventory tools provide helpful reporting necessary for your accounting records.
If you want to work with our accountants, please don’t hesitate to get in touch! We’ve helped dozens of businesses in bookkeeping, accounting, and tax returns. Contact us today to see how we can support you.